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How does the stock market work?

Understanding the Stock Market

What is the Stock Market?

The stock market is a dynamic marketplace where buyers and sellers trade shares of publicly listed companies. It serves as a platform for investors to buy and sell ownership in businesses, enabling companies to raise capital and investors to profit from the growth of those businesses potentially.

Key Players

1. **Investors:** Individuals or institutions who buy and sell stocks.
2. **Companies:** Businesses that issue stocks to raise capital.
3. **Brokers:** Intermediaries facilitating stock trades.
4. **Regulators:** Government entities ensuring fair practices.

How it Works

 Stocks and Shares

- Stocks: Represent ownership in a company.
- Shares: Individual units of stock.

 Buying and Selling

1. Stock Exchanges: Platforms where stocks are bought and sold (e.g., NYSE, NASDAQ).
2. Brokers: Connect buyers and sellers.
3. Orders: Instructions to buy or sell stocks.

Stock Prices

- Supply and Demand: Prices fluctuate based on market forces.
- Market Capitalization: Total value of a company's outstanding shares.

The stock market is a place where companies can grow capital by selling their stock/equity to people/investors. The shareholders and investors then have partial ownership of the company If they were to buy the company's stock. This allows them to have voting rights for their ownership of the company. This also allows them to obtain the company's corporate earnings in the form of Capital gains or Dividend payments. This allows companies to get more funding to better help themselves and for investors to make money from the company's stock. 

One way people can make money from the stock market is:

A company is realising their quarterly reports and the stock price will change whether the company has a positive or negative report. 

Jeff thinks that this company will have net profit and that the quarterly report will be positive. So he wants to buy shares of the stock.

Let's say the stock price is priced at $100. Jeff thinks that the stock will do really well so he is willing to risk more money. He decides to buy $10,000 worth of stock in this company. Now for the math:

$10,000(total investment) / $100(stock price) = 100(shares in the company stock)

The company ends up doing great and the stock price rises to $102.  

This means that the stock price increased by $2.

$102(new stock price) - $100(original stock price) = $2(share price gains)

Now Jeff sells all of his shares and collects this income from capital gains. Let's calculate How much he would make from this. There are a couple ways to calculate this, so here is a couple.

(100(shares owned) × $102(new stock price)) / (100(shares owned) × $100(old stock price))

$10,200(new shares value) - $10,000(original shares value) = $200(profit)

Keep in mind that this is just an example and you can lose money on this, but this an easy way to show how money can be made. This also excludes trading fees and other fees that are included with capital gains.

Capital gains: When a company's value increases, therefore, each individual share price increases, and you make monetary gains.

Dividend payments: A company will make payments either each quarter of each half year and pay their shareholders for holding the risk of holding shares in that particular company.

How can you make money from it?

  1. Buy and hold: This strategy involves buying stocks that you believe will appreciate in value over the long term, and holding onto them for an extended period of time. This can be a good approach for investors looking to build wealth over the long term and are willing to tolerate short-term fluctuations in the market.

  2. Dividend investing: Some stocks pay dividends, which are periodic payments to shareholders. By investing in dividend-paying stocks, you can earn income from your investments in addition to any capital appreciation.

  3. Options trading involves buying and selling stocks within a shorter time frame, often based on technical analysis or other market indicators. Trading can be riskier than buy-and-hold investing, as it requires a greater level of knowledge and skill to be successful. This is typically very risky, and has much higher fluctuations within the market.

  4. Investing in mutual funds or exchange-traded funds (ETFs): These types of investment vehicles allow you to invest in a diverse portfolio of stocks or other assets, which can help to mitigate risk. The diversity allows there to be lower fluctuation and more constant capital gains.

  5. Investing in Bonds with companies, governments, or municipalities. This investment strategy typically carries the lowest risk out of the other investment strategies. Bonds are basically loans that you van give out to companies, the US Government, Foreign Governments, and Government Municipals. With these, you usually will make money every year as you collect interest and eventually when the person who receives the bond pays back the principal. The yield, or return rate, depends on how risky it is to invest in that certain thing. ex. The yield would be lower for a US Treasury bond, than a small-cap/more risky company.

Its always important to realize that there is a risk with investing in the stock market and that, technically, nothing is guaranteed.

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